Chatham Lodging Trust — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Chatham is a self-advised lodging REIT focused on upscale extended-stay and premium-branded select-service hotels. At quarter-end it owned 35 hotels with 5,355 rooms and held minority interests in three joint ventures.
Financial and operating performance
Amounts below are in millions except per-share data, percentages, and hotel operating statistics.
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Total revenue | $72.3 | $47.1 | $131.2 | $83.9 |
| Operating income | $18.1 | $5.0 | $26.5 | $7.5 |
| Net income | $12.8 | $65.3 | $14.3 | $63.6 |
| Net income attributable to common shareholders | $12.8 | $65.2 | $14.2 | $63.5 |
| Diluted EPS | $0.33 | $2.44 | $0.37 | $2.38 |
| Operating margin, approximate | 25.0% | 10.6% | 20.2% | 8.9% |
| Hotel EBITDA | $32.8 | $20.3 | $56.4 | $32.9 |
| Adjusted FFO | $27.2 | $14.8 | $42.2 | $22.3 |
- Growth and comparability: Revenue increased 53.5% in Q2 and 56.3% in the first half, largely reflecting hotels acquired since the comparable 2014 periods. For 25 hotels owned throughout both periods, room revenue rose 5.5% in Q2 and 4.5% in the first half.
- Hotel performance: Across the 35-hotel portfolio, Q2 occupancy was 85.8% versus 86.4%, ADR was $161.96 versus $151.17, and RevPAR was $138.92 versus $130.57. RevPAR rose 6.4%, driven by a 7.1% ADR increase despite lower occupancy. First-half RevPAR increased 6.6%, with ADR up 8.1% and occupancy down 1.4%.
- Margins and costs: Q2 Hotel EBITDA margin was approximately 45.4% of revenue, compared with 43.1% a year earlier. Hotel operating expenses rose 46.2% in Q2, less than revenue growth; acquisition-related hotels accounted for most of the increase. Interest expense rose 57.1% in Q2 and 68.7% in the first half, principally from debt associated with acquired properties.
- Cash flow: First-half operating cash flow was $37.5 million; investing cash outflow was $101.9 million, including $90.2 million for the San Diego Gaslamp acquisition and $9.2 million of hotel improvements. Financing cash inflow was $67.4 million, including approximately $120.8 million of share issuance proceeds. Cash and equivalents ended at $18.1 million, versus $15.1 million at year-end 2014.
- Debt and liquidity: Mortgage debt was $521.4 million; the revolving facility had no balance and $175 million of borrowing availability. The company reported a 38.2% leverage ratio, average mortgage rate of approximately 4.7%, fixed-charge coverage ratio of 3.13, and compliance with financial covenants. Restricted cash was $18.5 million and should not be treated as freely available liquidity.
- Shareholder distributions: Dividends were $0.30 per common share for Q2 and $0.60 for the first half. The monthly rate increased to $0.10 per share in January 2015.
Material changes, outlook, and risks
- Q2 2014 and first-half 2014 net income included a $66.7 million gain related to the Innkeepers JV transaction and Silicon Valley hotel acquisition. The absence of that one-time gain explains why reported GAAP net income fell sharply year over year; 2015 operating results and Adjusted FFO improved. Non-GAAP measures are supplemental and are not measures of cash available for distributions.
- Chatham projected its 2015 hotel RevPAR growth at 5.5%–6.5%, with all projected growth expected to come from ADR. Management cited anticipated lodging demand growth exceeding new supply and expected favorable industry conditions into 2016; these are expectations, not guarantees.
- Management expected operating cash flow, cash balances and available borrowing capacity to cover near-term needs and expected to meet covenants through the rest of 2015. Long-term funding for acquisitions and maturities may require additional debt or equity, or asset sales.
- Capital investment: the company expected to spend a further $7.3 million on existing-hotel improvements in 2015. Planned expansions of four Silicon Valley hotels were expected to add 272 rooms, with anticipated total spending of $70–$80 million; budgets were not final. The Mountain View expansion was underway, with other starts anticipated in 2016.
- Subsequent event: Chatham acquired the 104-room Residence Inn Dedham on July 17, 2015, funded with cash and revolving-facility borrowings.
- Risks include lodging seasonality, economic and industry demand, competition and operating-cost increases, interest rates, access to financing, and execution of acquisitions and renovations. A California wage-and-hour class action involving an affiliate and hotel manager remained pending; the company accrued $642,000, which it estimated as its maximum possible loss. Related-party manager IHM managed 33 wholly owned hotels and many JV hotels; management fees and potential conflicts merit attention.
Investor facts to verify
- Separate same-hotel operating growth from acquisition-driven revenue and expense increases, and confirm the precise portfolio comparison used for RevPAR and occupancy.
- Review the $66.7 million prior-year transaction gain and the definitions and reconciliations of FFO, Adjusted FFO, EBITDA and Hotel EBITDA.
- Assess unrestricted cash, required minimum cash, restricted-cash commitments, revolver availability, debt maturities and covenant headroom.
- Track the Dedham acquisition financing, planned Silicon Valley expansion budgets and funding needs, and actual capital expenditures against management’s estimates.
- Monitor the California litigation, related-party IHM arrangements, and potential JV capital calls or other obligations.